The electricity grid: A history

Drawing by Thomas Edison in 1880 patent file. From the U.S. National Archives.

In the early days of electricity, energy systems were small and localized. The Pearl Street Station in New York City, launched in 1882, was the first of these complete systems, connecting a 100-volt generator that burned coal to power a few hundred lamps in the neighborhood. Soon, many similar self-contained, isolated systems were built across the country.

During this era, two major types of systems developed: the AC and DC grids. Thomas Edison, who designed Pearl Street, was a proponent of direct current (DC). In a direct current, the electrons flow in a complete circuit, from the generator, through wires and devices, and back to the generator.

William Stanley, Jr. built the first generator that used alternating current (AC). Instead of electricity flowing in one direction, the flow switches its direction, back and forth. AC current is what is used almost exclusively worldwide today, but in the late 1800s it was nearly 10 years behind DC systems. AC has a major advantage in that it is possible to transmit AC power as high voltage and convert it to low voltage to serve individual users.

From the late 1800s onward, a patchwork of AC and DC grids cropped up across the country, in direct competition with one another. Small systems were consolidated throughout the early 1900s, and local and state governments began cobbling together regulations and regulatory groups. However, even with regulations, some businessmen found ways to create elaborate and powerful monopolies. Public outrage at the subsequent costs came to a head during the Great Depression and sparked Federal regulations, as well as projects to provide electricity to rural areas, through the Tennessee Valley Authority and others.

By the 1930s regulated electric utilities became well-established, providing all three major aspects of electricity, the power plants, transmission lines, and distribution. This type of electricity system, a regulated monopoly, is called a vertically-integrated utility. Bigger transmission lines and more remote power plants were built, and transmission systems became significantly larger, crossing many miles of land and even state lines.

As electricity became more widespread, larger plants were constructed to provide more electricity, and bigger transmission lines were used to transmit electricity from farther away. In 1978 the Public Utilities Regulatory Policies Act was passed, making it possible for power plants owned by non-utilities to sell electricity too, opening the door to privatization.

By the 1990s, the Federal government was completely in support of opening access to the electricity grid to everyone, not only the vertically-integrated utilities. The vertically-integrated utilities didn’t want competition and found ways to prevent outsiders from using their transmission lines, so the government stepped in and created rules to force open access to the lines, and set the stage for Independent System Operators, not-for-profit entities that managed the transmission of electricity in different regions.

Today’s electricity grid – actually three separate grids – is extraordinarily complex as a result. From the very beginning of electricity in America, systems were varied and regionally-adapted, and it is no different today. Some states have their own independent electricity grid operators, like California and Texas. Other states are part of regional operators, like the Midwest Independent System Operator or the New England Independent System Operator. Not all regions use a system operator, and there are still municipalities that provide all aspects of electricity.

Who has the authority over transmission is also equally convoluted. Individual states control some aspects of the lines on their soil, but the rules are implemented by the operators. And others are managed by the North American Reliability Council, the Federal Energy Regulatory Commission, and the Department of Energy.

In today’s market, some states are deregulated and some are not. Even in non-deregulated states, different companies own the power plants and the utilities to which you write your monthly checks.

The Electricity Marketplace

Boulder Dam wires. Photo by Ansel Adams, from U.S. National Park Service.

Electricity has to be produced within moments of its use. Its markets are bound tight to the paths electricity can take – the geography of power lines – and how much towns and cities need at any moment. And yet, intentionally, the retail electricity prices that we pay are buffered from the wholesale marketplace.

Gasoline is an example of where we energy consumers can see the market forces at work. The price of gasoline sways with the crude oil market, usually somewhere between $70 and $100 per barrel. Those swings are reflected back at the pump, a place any driver is familiar with. No one is surprised by a nickel’s worth of change here or there, but when prices increase by enough, some people actually reduce their driving.

Electricity doesn’t really work that way. The prices in the electricity market can easily double or more, routinely, every single day, and consumers like you and me will never know. (See figure below). The rate that we users pay is tightly regulated by regional authorities, which themselves vary depending on where you are (and not only by state).

Furthermore, we’re insulated from the market because, from our perspective, supply is virtually bottomless. We don’t sign a contract in advance that says we’ll receive a certain amount of electricity and no more. We never hear from the utility saying, we can’t give you that power you wanted, we’re out. We go straight from experiencing bottomless supply, to blackout, and we have no control over either case. And unlike the gas pump, we can’t choose where we buy: a monopoly.

And yet, the power plants, the fuels markets and the power companies are a competitive, by design.

The figure, from a few days in June 2011, shows average prices. They are aggregated from the hourly prices at the various distinct places within Maine, which themselves are based on mathematical algorithms and what they predicts is the logical price. However, though these prices matter, no one really pays these average prices. Some power plants are paid by node – a theoretical geographical point – so they get paid according to the price at that hour at their location. Some power plants get paid by zone, a larger geographical area encompassing nodes. The actual market prices and settlements happen in a market that’s administered by a company, not the government. In Maine’s case, the state participates in a larger, regional market moderated by the New England Independent System Operator, a non-profit company. However, the power lines in Maine are joined in a vast network of power lines all the way across the Eastern seaboard, in the Eastern Interconnection. Therefore, market participants in New England can buy and sell electricity outside of New England too.

Further complexity arises because utilities enter long-term contracts with power plant owners for electricity at a particular cost, years ahead of time. They also enter short-term contracts, and they can buy energy on the spot market, right before they need to deliver it.

MEETING DEMAND: BASE AND PEAK LOAD

A lot of planning goes into making sure there’s enough electricity at any particular moment, making the most of the type of power plants available: sort of like a symphony of different players at different geographic locations.

Many large power plants, nuclear and coal plants particularly, can produce huge amounts of energy. However, to turn on and ramp up these plants to full capacity takes time and costs a lot of money, even though once the plants are running, producing energy is relatively cheap. Instead, these kinds of plants are applied to the base load, or the minimum amount of energy needed. They run all the time and shut down only for special reasons like maintenance.

At the same time, other kinds of power plants are applied to the peak load, the maximum amount of energy needed. Usually powered by natural gas, they are called peaker plants, and though the electricity they produce is generally more expensive, they can be turned on and ramped up or down quickly and for far less cost than the base plants.

American electricity infrastructure developed regionally, in a slowly filling patchwork of power plants, power lines, and power authorities. Each region of the United States has its own market, with its own, vastly different rules.

One example of diversity in market rules is how to manage payments. The organizations responsible for reliability on the grid and administering the electricity market aren’t allowed to make a profit. At the same time, electricity itself can’t really be tracked, the electrons have no name tags. So even though utilities sign long-term contracts with power producers, there’s no way to guarantee if a power plant in West Texas generated the electricity that it sold to a utility in North Texas. Instead, the market’s moderated through the transmission authorities, who get the money from the utility, and pay the money out to the power plants.

As with the stock market, electricity markets have different products and ways of investing, but every region has different rules about which ones are allowed and how they should be bought and sold.

To really complicate things, market rules don’t even apply to whole states! Take a large state like California. It has its own stringent environmental laws, it has a public utilities commission and an energy commission, and it has its own electricity market and administrator, the California Independent System Operator. However, some parts of Northern California participate in the Northwest power market instead. And there are six small regions in the state of California that are their own balancing authorities, including Los Angeles Department of Water and Power and the Sacramento Municipal Utility District.

For descriptions of U.S. markets see here, as expressed by the Federal Energy Regulatory Commission.

For a map of which states have restructured (deregulated) their energy markets to allow for retail choice, see here.